Chapter 3 - Settlement Characteristics Flashcards
What is securities settlement?
The process of transferring securities and funds between buyer and seller after a trade
What is trade matching?
The process where trade details (price, quantity, counterparty) are verified before settlement
What is settlement risk?
The risk that one party fails to deliver cash or securities on settlement day
What is post-trade processing?
The steps after a trade is executed, including clearing, settlement, and custody
What are the key steps in trade settlement?
Trade execution → Clearing → Settlement → Custody
What is clearing in securities trading?
The process of verifying trade details and preparing for settlement
What is a Central Counterparty (CCP)?
An intermediary that guarantees trade settlement, reducing counterparty risk
What is novation in trade clearing?
The process where a CCP becomes the buyer to every seller and the seller to every buyer
What is a bilateral trade settlement?
A settlement where two counterparties exchange securities and cash directly
What is a multilateral netting system?
A system where multiple trades are offset, reducing the number of payments needed
What is T+2 settlement?
A system where trades settle two business days after the trade date
What is a same-day settlement (T+0)?
A system where trade settlement occurs on the same day as execution
What does rolling settlement mean?
A system where settlement happens on a fixed cycle (e,g T+2) rather than a specific date
What is a fail in securities settlement?
A situation where one party does not deliver securities or cash on the agreed settlement date
What is a buy-in process?
A remedy where a buyer purchases securities in the market to cover a seller’s failure
What is Delivery Versus Payment (DVP)?
A settlement method ensuring securities are delivered only if payment is received
What is Free of Payment (FOP)?
A securities transfer without simultaneous payment
What is Delivery Versus Delivery (DVD)?
A method where securities are exchanged between two parties without cash settlement
What is Payment Versus Payment (PVP)?
A settlement mechanism ensuring payment occurs in both currencies before trade completion
What is a real-time gross settlement (RTGS) system?
A system that settles transactions instantly on a one-by-one basis
What is a custodian bank?
A financial institution that holds and safeguards securities for investors
What is a Central Securities Depository (CSD)?
An entity that holds securities electronically and facilitates settlement
What is an International Central Securities Depository (ICSD)?
A global depository (e g, Euroclear, Clearstream) that handles cross-border settlements
What is a nominee account?
An account where a financial institution holds securities on behalf of investors
What is a beneficial owner?
The actual owner of securities, even if held in a nominee account
What is securities lending?
The temporary transfer of securities from one party to another for a fee
What is a repo (repurchase agreement)?
A short-term sale of securities with an agreement to repurchase them at a higher price
What is collateral in securities lending?
Assets provided by the borrower to secure the loan of securities
What is a short squeeze?
When short sellers are forced to buy back securities at rising prices due to supply shortages
What is rehypothecation?
When a bank or broker uses a client’s collateral for its own transactions
What is a failed trade?
A trade that does not settle due to missing cash or securities
What is a settlement delay?
When settlement takes longer than the expected cycle due to operational issues
What is counterparty risk?
The risk that the other party in a transaction defaults on its obligations
What is operational risk in trade settlement?
The risk of errors, system failures, or human mistakes affecting settlement
What is systemic risk?
The risk that failure in one financial institution leads to widespread market disruption
What is a corporate action?
An event initiated by a company that affects its securities (eg, dividends, mergers)
What is an ex-dividend date?
The date when a stock begins trading without the right to the next dividend
What is a stock split?
A corporate action increasing the number of shares while reducing the share price
What is a rights issue?
When a company offers new shares to existing shareholders at a discount
What is a mandatory corporate action?
An event that affects all shareholders (e g , stock splits, mergers)
What is the role of a financial regulator in trade settlement?
To oversee settlement practices and enforce compliance with market rules
What is the Central Securities Depositories Regulation (CSDR)?
EU regulation that standardizes securities settlement rules and reduces settlement failures
What is Know Your Customer (KYC) in securities trading?
A requirement for financial institutions to verify the identity of clients
What is Anti-Money Laundering (AML) compliance?
Regulations to prevent financial crime through securities transactions
What is the penalty for failed settlement under CSDR?
Financial fines and mandatory buy-ins for persistent settlement failures
What is Straight-Through Processing (STP)?
Automation of trade processing from execution to settlement without manual intervention
What is blockchain in trade settlement?
A distributed ledger system that ensures secure, transparent trade processing
What is the impact of AI in post-trade operations?
AI enhances risk detection, fraud prevention, and settlement efficiency
What is a trade repository?
A centralized database for storing details of securities transactions
What is the role of FinTech in securities settlement?
Improving speed, security, and efficiency through digital solutions
